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[F223]Financing A New Home

by Dave Badger, Dav

Chicago is the largest city in the state of Illinois and also the third most populated city in the United States of America, with almost 3 million people. Chicago is located along the southwestern shore of Lake Michigan and when combined with its suburbs and the nine surrounding counties in Illinois, the metropolitan area known as Chicagoland encompasses a population of 9.4 million. Nowadays Chicago is known as a major transportation, business, and architectural center of the US and it is the economic, business, financial and cultural capital of the Midwest. The Chicago area is moderately expensive; the home price median here is nearer the national median than homes in spots such as New York City. Buyers can probably spend about three times their incomes, depending on the part of the area where they're house-hunting.

Chicago's suburban real estate market is as vibrant as the city itself. The suburbs have developed both commercial as well as residential real estate at a tremendous pace. A large number of properties are always available for purchase in Chicago's suburban areas such as Lake County, Kane and DeKalb counties and DuPage and Will counties. There are real estate firms that specialize in one of the suburbs, while others deal with all of them. When financing a new home in Chicago, have in mind that the real estate prices are high. Northern suburbs are considered "elite".

There are many ways to finance a new home in Chicago. It all depends on your credit history, the price of the property and your income. The next paragraphs give brief explanations on some of the methods for financing a new home in the city of Chicago.

The first thing to understand is the difference between a variable, or adjustable interest rate mortgage and a fixed rate mortgage. With a fixed rate mortgage, the monthly payments remain the same over the period of the loan. The adjustable rate mortgage has a lower introductory interest rate, but it may vary over the duration of your loan. So depending on the interest rates, whether they are lowered or raised each month, your monthly mortgage payments will also change accordingly.

When financing your new Chicago home through a loan, no matter if it is adjustable or fixed rate, you have to consider the length of the loan, in terms of how long you finance your home. The most common terms are 15, 25, 30, 40 and now even 50 year mortgages in some areas. Of course, the longer the period the more you will pay in interest over the duration of the loan.

With a FHA home loan you can purchase a single family home, condo, house, or apartment in one of the neighborhoods in Chicago. This FHA home loan is mostly used by first time home buyers because it allows the purchase of a home with a lower down payment, in some cases as low as 3%. This form of new home financing requires you to have a good credit history and enough income to cover the loan and your other financial obligations.

The Chicago City Mortgage program offers qualified first-time homebuyers 30-year, fixed-interest mortgages at competitive interest rates and a gift of 4 percent of the mortgage amount to cover down payment and closing costs.

One of the most important things to do when searching for a way to finance the purchase of a new home is to do the math and find out how much money you can spend on it each month. The rule is that all of your housing costs each month, including house note, property taxes and insurance cannot exceed 29% of your gross monthly income. In addition to that, your housing costs plus your other monthly long-term debt should not exceed 41% of your gross monthly income. Furthermore, you must get a copy of your credit report and check your credit score. Having a bad credit score, or one lower than 580, means that you will have problems with obtaining the loan in the first place, not to mention that you will be forced into paying higher interest rates.

There is no question that guidelines for credit approvals have tightened compared to this time last year. The same person, who applied for a mortgage one year ago, may not be approved today. Unfortunately, this is the result of abusive lending practices where borrowers were tempted with introductory low rates of interest; once the promotional period was over, the rates rose to an unaffordable high, causing many people to lose their homes. In August 2007, the amount of foreclosures increased by 115 percent from August 2006 - one in 510 households was affected.

Buyers should not be scared off by the prospect of financing a new home, the past errors has created a climate of caution, with stricter policies that ensure the borrower can afford the rate for the life of the loan. These are sensible lending practices that ensure people are buying what they can afford.

The Average Borrower

The average prime borrower may have some stricter rules, but there should be no difficulty getting credit. They may be required to produce more income and asset verification than in the past, and will be required to demonstrate timely bill paying and an acceptable debt-to-income ratio.

The High Risk Borrower

Anyone with credit problems may run into some road blocks when trying to get a new mortgage. There are nonprofit groups which offer free counseling to buyers that have difficulty qualifying for home loans as well as match them up with potential lenders.

Second Home Buyers

Surprisingly, this more affluent group of borrowers can also run into some problems; they are considered more of a high risk because of high expenditures and limited cash flow. They may find themselves paying higher interest rates and higher mortgage insurance rates. Where a first home mortgage may only have to produce a down payment of 5 percent, it's not unusual to request 10 to 20 percent down for a vacation home loan. This is not a reflection of the current climate in lending, these requirements have been in place for years.

Often home owners will purchase a vacation home by acquiring a home equity loan based on their present home. This does come with higher interest rates as well as the risk of losing your principle residence if you run into financial problems. Keep in mind however; New York CPA Paul Kamke advises there is an IRS rule that states "you have just 90 days from purchase to secure a mortgage against a principal or vacation residence. Do it later and you can't deduct it at all".

If you intend on renting out your second home, be prepared to provide a business plan outlining how you plan to generate cash flow. If it is currently being rented, most lenders will only take 75 to 80 percent of the rental history in consideration.

Basic lending Criteria:

Whether you have good credit, bad credit or looking to add to your current real estate portfolio, a mortgage lender always looks for the following basic criteria:

Collateral: The property or goods used as security against your loan, sometimes known as Loan to Value or LTV.

Credit History: This involves your track record for paying bills on time and making the minimum payment required.

Capacity: Will you be able to pay off this loan and still feed the family?

Commitment: How much of a down payment are you making; the bigger the better.

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Both Dave Badger & Re Writer are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Dave Badger has sinced written about articles on various topics from Home Management, Finances. . Dave Badger's top article generates over 6600 views. to your Favourites.

Re Writer has sinced written about articles on various topics from Family, Austin Properties and The Beach Resort. Visit Coldwell Banker's High Country Realty for complete listings. Be sure to check. Re Writer's top article generates over 1500000 views. to your Favourites.